The compass is irritated only in relative close proximity to The Swan. The effect of magnetic fields falls off proportionally to the cube of the distance from the source, unlike wave-effects (such as light) which fall off with the square of the distance from the source.

The compass is irritated by mysterious or mystic energies that originate from the Island.

When Richard interviewed the young Locke, he was upset that Locke picked up the knife. Locke has lived with the knife so far - now Richard, in giving him the compass, is saying "this is a point of change".

A compass is about direction but also discovery. It is used on the path to a location, not once you get to that location.

Young Locke would have been correct to choose the compass. He only chose the knife because Locke, young and old, has an affinity for knives. So, like a child, he simply chose the object he liked best, not the one he should have known was his in another life/time. This refusal to accept his past/future destiny is shown later in Cabin Fever when teenage Locke refuses the science camp.

Young Locke only picked one item, and it was the knife. He pulls a few items from the group including the sand, compass, and knife. After doing so, he ultimately chooses the knife - the only item he chooses.

Way back Sayid pointed out that the compass he had did not point to north as it was supposed to. Perhaps the way north faces points the correct course off the Island, which Daniel is currently trying to figure out.

But the Hatch was still around then and the electromagnetic pull of the station was distorting the compass bearing. Since the implosion compasses have worked just fine or at least have not been mentioned as inaccurate.

Note that Richard told John that the next time they met, he "wouldn't recognize him" - not that he wouldn't know him, and there is a distinct difference. Many have wondered how Richard knew to visit baby John Locke in the hospital shortly after his birth. It could be that past Richard met future John, and thus knew that he was special and knew to look for him as a child. This would also explain why Richard said to John in Cabin Fever "No John, which of these belongs to you already?"

Richard sets this all up to let his past self find Locke at a young age and train him, but it fails? This one is a bit of a stretch.

Locke didn't fail. Richard wasn't recruiting anyone. He was just trying to find out if that was the right John Locke. Locke succeeds by selecting all three of those. Richard's uses 'he's not ready' as his excuse for coming there, finding out what he needed, and leaving.

Locke going back to 1954 and talking to Richard led Richard to baby Locke, young Locke, and teenage Locke (and perhaps why Abaddon is seen with Locke later when Locke is in the wheelchair), thereby Locke established himself as leader in the past. This was accomplished when Richard gave young Locke a test for Locke to pick out which items were his. Richard gave the compass to Locke, meaning it then belonged to Locke, if only for a short time. Locke gives it back to Richard to solidify Locke's story, then Richard has it until he uses it with young Locke to see if Locke knows that it was given to him. And it came full circle.

Locke selected the sand in the vial also, which is supposed to represent the Island. If you go by this theory above then you could say that he selected the sand because the Island already belonged to him (as well as the compass).

And of course... the knife. (Was it the same knife used to kill one of the 3 "Others"?)

The strange thing is that at the point in time when Richard gave Locke the compass, Richard had already had all the experiences with Locke in the past--including Locke's failed test as a young boy. Therefore, when future Richard gives the compass to Locke in order for Locke to return it to 1950's Richard, it is sort of like ensuring that 1950's Richard will have certain expectations for how young Locke will react. In other words, future Richard is purposefully and knowingly setting up young Locke to fail.

I suppose that could be the case, but the way Richard acted the day after Locke couldn't kill his father at the Other's camp would seem to indicate that setting him up to fail at a young age would be a means to an end in driving him towards returning as a grown man, which would fit in perfectly with all of the events that led to Locke displaying a leadership potential (the excitement of a paralyzed man walking again, his survival ability, his oneness with the Island, his "don't tell me what I can't do" attitude, all key in his arrival and rise to power on the Island).

You stated perfectly what I was trying to say. I didn't mean so much that Richard is trying to preserve the timeline (as if it needed his help, which Faraday seems to think otherwise), but more along the lines of what you just said. Future Richard would know that Locke wasn't ready when he was younger, but that given time and the testing of the walkabout on the Island, he would be. This is all assuming of course, that the meaning of the compass is tied to the test that Richard gives young Locke. The only problem with that is that when Locke relays the story of the compass to 1950's Richard, Locke explained that the compass wasn't Locke's but that future Richard gave it to him. So 1950's Richard knows that the compass is NOT one of the items that belongs to Locke ("I gave you this?" "Yes.").

The compass may present an ontological paradox, meaning the compass may have no origin since it exists in a loop in time, with each loop starting over when Locke travels back to 1954 and gives it to Richard.

However, the mechanics of the compass' time travel may work like that of the characters' in the show, following a non-recursive path through time: The "younger" version of the compass is given to Locke in 2008. Richard either holds on to the time-traveled compass in 1954 (and two versions of it exist at the same time), or it gets destroyed; either way, the "younger" version will always be given to Locke.

The compass is a reference to the movie "Somewhere in Time"

The movie Somewhere in Time was about a young man in the present who is given a pocket-watch by a mysterious old woman. He later goes back in time to find and be with her, and during his visit to the past he gives her the pocket-watch as a gift. The pocket-watch, possibly like this compass, does not seem to exist outside of this time loop. The similarity is certainly note-worthy.